General Electric (NYSE:GE) is a corporate jack of all trades. As a result, the ups and downs of specific industries -- like transportation or healthcare -- tend to balance each other out over time. This, in turn, leads GE's stock to closely track the overall economy.
But that story hasn't really played out in 2014. While the S&P 500 has climbed to new heights -- returning 7% to-date -- GE's stock has dropped 7%. And this uninspiring trend could very well continue.
GE is attempting to pull off the daunting feat of shrinking GE Capital, a division that accounted for 30% of its revenue in 2013. Beyond that, there are a few other roadblocks that could stall GE's stock in the years to come. Let's take a look at these one by one.
1. GE's too big to manage
One of the most common complaints about GE is that the sum of its parts are worth greater than the whole. Or at least they would be should GE decide to separate itself into different companies.
There is no way of proving this hypothesis, but there is certainly evidence that GE's management team fails to make the most of its assets from time to time. If that's the case with the recent $16.9 billion acquisition of purchase of Alstom's power business, this stock's in for a rude awakening.
Consider, for example, the perennially disjointed NBCUniversal segment and GE Capital's derivatives fiasco in recent years. These missteps show that GE has dropped the ball --sometimes with disastrous consequences -- due to its largesse.
Of course, GE attests that Alstom is a different sort of transaction -- i.e., it's a highly relevant industry and GE has experience working in France -- but there are plenty of reasons to be skeptical. GE Appliances, for example, is a prime example of management squandering a promising asset.
Back in 2008, GE was itching to spin off the appliance operations, hoping to fetch a price in the low-to-mid $6 billion range. That potential sale fell through, so GE kept the business and committed $1 billion to reinvigorate it. Less than two years ago, management was trumpeting the turnaround of GE Appliances, particularly the operations in Louisville's legendary Appliance Park.
But selling refrigerators and ovens doesn't pay like it used to: profit margins are a mere 4.6%. And now GE is in the middle of negotiating with buyers to sell the whole operation for a measly $2 billion-$2.5 billion. That's not the outcome that shareholders were hoping for. Further, it's a prime example of how a company's unwieldy size can lead to lackluster overall returns.
2. A question mark hangs over GE's future leadership
Given the information above -- that GE's multifaceted business can be difficult to manage -- it's undoubtedly important that shareholders feel comfortable with the leadership team, particularly the CEO. But for the time being there's a cloud of uncertainty around who that might be in the years to come.
According to the Wall Street Journal, Jeff Immelt, GE's CEO of 13 years, has led several board discussions about shortening the expected tenure for the chief executive. At some point, GE made the decision to have CEOs stick around for at least two decades, but it looks less likely this will be the case with Immelt.
Now, the fact that Immelt could step down in the near future does not mean that he will, and there's good reason to believe that the succession process will be thoroughly communicated to shareholders well in advance. But few outside the company (and perhaps within) can convincingly point to the candidate that would be next in-line. Again, the Wall Street Journal has surmised that seven different names could be in the mix, but there's no identifiable front-runner at this point.
Adding another wrinkle to this issue, GE decided to part ways with John Krenicki, the former CEO of GE Energy, in 2012. It was a surprising move for a couple of reasons. Krenicki was running a $50 billion enterprise that had grown from a blip on the radar merely a decade prior. GE Energy's success was largely due to Krenicki's impressive leadership, and he promised to double the size of the energy business to $100 billion before the sudden departure.
After 28 years within the company, Krenicki's career mirrored Immelt's in many ways. As a result, he was seen as the most promising candidate to replace him when the time came. But Krenicki's no longer in the mix and the energy business at the heart of GE has been split into three units. Only time will tell whether it can continue to thrive under new management.
Krenicki's departure left a gaping hole in GE's leadership team. He was effectively running a Fortune 50 company within GE, and he was positioned to be first in line should Immelt decide to step down. The lack of a clear succession plan could dampen investors' enthusiasm and weigh on GE's stock price.
3. This could be the worst time to buy a cyclical stock like GE
GE is one of the oldest manufacturers in America, and it has therefore witnessed its fair share of economic cycles. That doesn't mean, however, that GE's somehow immune to the ups and downs of those cycles. They can still wreak havoc on its stock price, and now could be one of the worst times to plow money into a cyclical company like GE.
Let me preface this by stating that the Motley Fool is not an advocate of timing the market -- by any stretch of the imagination. However, the world of industrial companies presents a unique situation. Companies like GE are not consumer-facing in the way that Apple or Samsung are. GE sells most of its products to organizations in the private or public sectors -- like railroads, airlines, or the Department of Defense.
Why does this matter? Well, to borrow insight from Ken Fisher, CEO of Fisher Investments, industrial companies tend to "produce huge machinery or other complex products with big sticker prices. And for this reason, out of all the sectors, Industrials has historically been the most economically sensitive and the most correlated to the broader market." Big-ticket items require deep pockets, and consequently, organizations that sense economic uncertainty are the first to tighten their purse strings.
This does not bode well for GE at a time when an economic slowdown could be just around the corner. First off, there's plenty of uncertainty right now, whether it's related to the dangers of war, Asia's slackening growth outlook, or the perils of an increasing divide between high and low incomes. If any of these issues were to escalate, it's likely that purchasing departments would curb their spending habits.
Secondly, the American economy -- GE's largest market -- is well into the fifth year of a bull market. The average bull market, for comparison, has lasted only 3.8 years during the era following the Great Depression. We are currently witnessing one of the longest stretches of economic growth since the beginning of World War II. And guess what: Stocks are incredibly pricey compared to historical averages. Currently the S&P 500 is priced 25% higher than the long-term average price-to-earnings ratio of 15.
By all means, I am not trying to call a market bottom right here, right now. I am noting that GE's exposure is global, it operates in an economically sensitive industry, and therefore this is not an ideal time to buy shares. What's more is that companies like GE will feel the brunt of a pullback more severely than those from almost any other sector.
Even if you believe that GE's poised to prosper in the long run, a correction could wreak havoc on its stock in the near term. Given this scenario and the fact that the economy will hit a wall at some point (it always does), it might be best to hang out on the sidelines for now.
The takeaway for investors
GE's picked up a lot of momentum in recent years by digging itself out of a hole created by GE Capital and pushing the throttle in the energy and aviation markets around the world. Still, much of GE's progress could come undone through a costly acquisition or a serious management misstep. Tack on a lukewarm economic environment in many regions of the world, and there's good reason to be skeptical about GE's ability to outperform.
Isaac Pino, CPA owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.